State of Hawai i General Obligation Bonds of 2019 $550,000,000* - - PowerPoint PPT Presentation

State of Hawai‘i

General Obligation Bonds of 2019

$550,000,000* Investor Presentation January 28, 2019

*Preliminary, subject to change

This electronic Investor Presentation you are about to view is provided as of January 28, 2019 for a proposed offering by the State of Hawai‘i (the “State”) of its General Obligation Bonds of 2019 (“the Bonds”). If you are viewing this presentation after January 28, 2019, there may have been events that occurred subsequent to such date that would have a material adverse effect

• n the financial information that is presented herein, and neither the State, nor Bank of America Merrill Lynch as Representative
• f the Underwriters, has undertaken any obligation to update this electronic presentation. All market prices, financial presentation

prices, data and other information provided herein are not warranted as to completeness or accuracy and are subject to change without notice. This Investor Presentation is provided for your information and convenience only. Any investment decisions regarding the Bonds should only be made after a careful review of the complete Preliminary Official Statement. By accessing this presentation, you agree not to duplicate, copy, download, screen capture, electronically store or record this Investor Presentation, nor to produce, publish or distribute this Investor Presentation in any form whatsoever. This Investor Presentation does not constitute a recommendation or an offer or solicitation for the purchase or sale of any security or other financial instrument, including the Bonds, or to adopt any investment strategy. Any offer or solicitation with respect to the Bonds will be made solely by means of the Preliminary Official Statement and Official Statement, which describe the actual terms of such Bonds. In no event shall the Underwriters or the State be liable for any use by any party of, for any decision made or action taken by any party in reliance upon, or for any inaccuracies or errors in, or omissions from, the information contained herein and such information may not be relied upon by you in evaluating the merits of participating in any transaction mentioned herein. Neither the State nor the Underwriters make any representations as to the legal, tax, credit or accounting treatment of any transactions mentioned herein, or any other effects such transactions may have on you and your affiliates or any other parties to such transactions and their respective affiliates. You should consult with your own advisors as to such matters and the consequences of the purchase and ownership of the Bonds. Nothing in these materials constitutes a commitment by the State, Underwriters or any of their affiliates to enter into any transaction. No assurance can be given that any transaction mentioned herein could in fact be executed. Past performance is not indicative of future returns, which will vary. Transactions involving the Bonds may not be suitable for all investors. You should consult with your own advisors as to the suitability of the Bonds for your particular circumstances. Clients should contact their salesperson at, and execute transactions through, an entity of the Underwriters or other syndicate member entity qualified in their home jurisdiction unless governing law permits otherwise.

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Disclaimer

Issuer: State of Hawai‘i Offering: General Obligation Bonds of 2019 Estimated Par Amount: $550,000,000*, consisting of the Series FW, FX and FY Bonds Financing Structure: All Fixed Rate Serial Bonds* Series FW ($454,265,000): January 1, 2023-2039 Series FX ($50,000,000): January 1, 2020-2022 Series FY ($45,735,000): April 1, 2019 Tax Status: Series FW: Federal and State Tax-Exempt Series FX & FY: Federally Taxable and State Tax-Exempt Security: Full Faith and Credit of the State of Hawai‘i Call Provisions: To Be Determined Ratings: S&P: AA+ (Stable) Moody’s: Aa1 (Stable) Fitch: AA (Positive) Use of Proceeds: Financing the costs of acquisition, construction, extension or improvement of various public improvement projects; including public buildings and facilities, elementary and secondary schools, community college and university facilities, public libraries and parks Co-Senior Managers: Bank of America Merrill Lynch (Lead Bookrunner), Morgan Stanley Co-Managers: Goldman Sachs & Co. LLC, Wells Fargo Securities, Stifel Nicolaus & Company, Inc. Pricing: Retail Order Period: February 5, 2019* Institutional Order Period: February 6, 2019* Closing: February 21, 2019*

* Preliminary, subject to change

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Transaction Summary

General Obligation Bonds of 2018 (January 2018) General Obligation Bonds of 2019 (January 2019) Economy YTD Unemployment Rate 2.1% (YTD through Nov.) 2.3% (2018) Visitor Arrivals 9.4 million (CY 2017) 9.9 million (projected 2018) Visitor Expenditures $16.7 billion (CY 2017) $18.3 billion (projected 2018) Proactively Managing Pension Liabilities Investment Returns +13.68% (FY 2017) 7.89% (FY 2018) Actuarial Value of Assets ~$17 billion (Oct. 2017) $16.51 billion (FY 2018) Funded Ratio 54.9% (FY 2017) 55.2% (FY 2018) Increased Contribution Act 17 Effective on July 1, 2017 Act 17 Effective for full Fiscal Year Years to Full Funding 26 Years 25 Years Commitment to Funding OPEB Investment Returns 9.5% (FY 2017) 7.3% (FY 2018) Fund Balances $880 million (FY 2017) $1.3 billion (FY 2018) Funded Ratio 8.6% (FY 2017) 12.1% (FY 2018) % of ARC Paid 89% of ARC Paid (FY 2018) 100% of ARC to be Paid (FY 2019) Council on Revenues Projections FY 2018 4.3% Projected 7.6% Actual FY 2019 4.3% each year 4.2% (FY 2019) FY 2020 to FY 2025 4.0% each year 4.0% each year Budget Controls Budget Restrictions 10% Budget Restriction (FY 2018) 5% Budget Restriction (FY 2019) State Treasury Pool Earning 1% Earning 1.6% as of FY 2018 Building Reserves EBRF Balance $310.7 million (FY 2017) $375.7 million (FY 2018) HHRF Balance $182.5 million (FY 2017) $182.5 million (FY 2018)

Developments Since Last Bond Sale

3 ____________________ Source: State of Hawai‘i, Department of Budget and Finance.

____________________ Source: State of Hawai‘i, Department of Labor and Industrial Relations, U.S. Bureau of Economic Analysis, U.S. Bureau of Labor Statistics.

 2018 unemployment rate of 2.3% (not seasonally

adjusted) was the lowest unemployment rate in the nation

 Hawai‘i's labor force, employment and job count

reached record levels in 2017 and has remained at record levels for employment and job count in 2018

 Wage and salary jobs count grew 1.0% in 2017 and

increased 1.7% in 2018

 The State's economy continues to diversify (see

chart to the right) with growth in Private Health Care and Professional and Business Services

 Hawai‘i military payroll jobs have remained stable

• ver the past 15 years despite changes in the

federal administration

Economic Update

4

Hawai‘i Employment Base

Annual Average CY 2018

Trade, Transportation & Utilities Leisure & Hospitality Professional & Business Services Federal military

• incl. DOD civilians

Federal Civilian Non-DOD Private Health Care State Government Local Government Natural Resources, Mining, Construction Financial Activities Private Education Manufacturing Information Other Services 17% 18% 12% 10% 2% 10% 10% 3% 5% 4% 2% 2% 1% 4%

0% 2% 4% 6% 8% 10% 12% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Honolulu State of Hawai'i United States

Median Household Income (CY 2008 to 2017) Historical Unemployment Rates (CY 2008 to Present)

____________________ Source: U.S. Census Bureau, Bureau of Labor Statistics. (1) Not seasonally adjusted.

2018(1) United States 3.9% Hawai‘i State 2.3% Honolulu 2.1%

$70,951 $67,744 $68,537 $66,146 $71,404 $73,388 $74,634 $77,273 $80,513 $81,284 $67,214 $64,098 $63,030 $61,821 $66,259 $68,020 $69,592 $73,486 $74,511 $77,765 $52,029 $50,221 $50,046 $50,502 $51,371 $52,250 $53,657 $55,775 $57,617 $60,336

$0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000 $70,000 $80,000 $90,000 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Honolulu State of Hawai‘i United States

Labor Market Update

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7.3 8.0 8.2 8.3 8.7 8.9 9.4 9.9 10.1 0.0 2.0 4.0 6.0 8.0 10.0 12.0 2011 2012 2013 2014 2015 2016 2017 2018 2019 $12,180 $14,365 $14,521 $14,973 $15,111 $15,911 $16,809 $18,312 $19,075 $0 $5,000 $10,000 $15,000 $20,000 2011 2012 2013 2014 2015 2016 2017 2018 2019

Hotel Occupancy Rate (%) Visitor Expenditures (in millions) Visitor Arrivals (in millions)

Calendar Year Calendar Year

____________________ Source: DBEDT, Smith Travel Research, Hospitality Advisors LLC. (1) 2018 and 2019 data are projected.

(1) (1)

Year First Quarter Second Quarter Third Quarter Fourth Quarter Annual Average 2013 82.0 74.2 77.8 72.3 76.5 2014 80.8 74.0 78.7 74.7 77.0 2015 80.0 77.7 79.4 77.8 78.7 2016 80.7 77.5 80.5 77.5 79.0 2017 81.4 79.4 81.4 78.6 80.0 2018 82.9 80.7 79.7 Year-to-Date 81.7

Tourism and Economic Outlook

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 Visitor arrivals and expenditures continue to be strong,

with both increasing in 2018 by 5.8% and 8.9%, respectively

 In terms of major market areas, In the first three quarters

• f 2018, arrivals from the U.S. West and U.S. East increased

9.6% and 8.4%, respectively. However, Japan arrivals were down slightly by 1.9%

 Total airline capacity, as measured by the number of

available seats flown to Hawaii, increased 7.1% in the third quarter of 2018, domestic seats increased 8.3% and international seats increased 4.3%, compared to the same quarter of 2017

 In the first three quarters of 2018, the statewide hotel

• ccupancy rate averaged 81.1%, 0.4 of a percentage point

higher than the same period of the previous year

 FY 2018 valuation includes full fiscal year impact of

increased contributions (see next page)

 FY 2018 actuarial value of assets increased to $16.5 billion

and the funded ratio increased to 55.2%

 Funding period effective July 1, 2018 is 25 years  FY 2017 valuation was positively impacted by 13.68%

investment return

 FY 2016 valuation impacted by several factors including

reduction in discount rate to 7%, negative investment returns and revised mortality expectations

Pension System Overview and Update

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ERS Total Valuation Summary ($mm)

FY 2016 FY 2017 FY 2018 Total Assets Market Value $14,070 $15,698 $16,598 Actuarial Value $14,999 $15,721 $16,513 Actuarial Accrued Liability $27,439 $28,649 $29,917 Unfunded AAL $12,440 $12,928 $13,405 Funded Ratio Market Value 51.3% 54.8% 55.5% Actuarial Value 54.7% 54.9% 55.2% Funding Period (Years) 66(1) 26 25 Active Members 67,377 65,911 66,271 Retired & Beneficiaries 45,506 46,927 48,569 Employer Contribution Rate 17.91% 19.16% 20.39% Employer Contributions $757 $781 $848

Source: Gabriel Roeder Smith & Co. Note: Projections assume constant active membership and that all assumptions are exactly met including a 7.0% return on market value of assets. (1) Does not reflect the impact of increased contribution rates adopted by Legislature on May 2, 2017.

 To meet the commitment that ERS achieve full funding within a 30-year

horizon, the State enacted legislation to phase-in higher system wide employer contribution rates in steps through FY 2021

 Increased contribution rates significantly decrease the liquidity risk to

the System

 The State has minimal exposure to Police and Fire employees

General Police & Fire FY 2017 17% 25% FY 2018 18% 28% FY 2019 19% 31% FY 2020 22% 36% FY 2021 24% 41%

Enacted Higher Rates (Employer Contributions)

($ in Billions)

UAAL(1)

Based on Valuation as of 6/30/2018

____________________ (1) Source: Gabriel Roeder Smith & Co. Projections assume constant active membership and that all assumptions are exactly met including a 7.0% return on market value of assets.

$- $2 $4 $6 $8 $10 $12 $14 $16 2018 2022 2026 2030 2034 2038 2042 2046

Fiscal Year

40% 50% 60% 70% 80% 90% 100% 110% 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042 2044 2046

Fiscal Year

% of UAAL Amortized(1)

Pension System Reforms and Projections

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$221 $481 $880 $1,295 $- $200 $400 $600 $800 $1,000 $1,200 $1,400 FY 2015 FY 2016 FY 2017 FY 2018 Millions Fiscal Year

Hawai‘i EUTF Prefunding Contributions

(FY 2014 – 2019)

____________________ (1) Minimum projected.

Fiscal Year

Hawai‘i EUTF Fund Balance & Funded Ratio

(FY 2015 – 2018)

2.4% 4.9% 8.6% 12.1%

OPEB Funding Actions

9

Adopted in FY 2013, Act 268, SLH 2013 required ARC to be fully funded by FY 2019

The State is now paying 100% of its OPEB ARC and had $1.2 Billion balance in the EUTF as of FY 2018

$0 $83 $164 $230 $297 $401 $100 $117 $250 $333 $337 $401

$0 $50 $100 $150 $200 $250 $300 $350 $400 $450 2014 2015 2016 2017 2018 2019 Millions Prefunding Requirement Total Prefunding Contributions

(1)

 The General Excise Tax (GET) and Individual Income Tax

comprise over 86% of the State’s annual General Fund tax revenues

 Quarterly forecasts by the independent Council on Revenues

support intra-year adjustments and long-term planning

 In January 2019, the Council made the following updates:

‒

Adjusted general FY 2019 revenue forecast from 5.0% to 4.2% due to reported collections

‒

Maintained forecast of 4.0% for FY 2020 - 2025

 The next Council on Revenues meeting is scheduled for March

2019

State General Fund Tax Revenue Composition (FY 2018)

General Excise Tax 52.7% Net Income Tax - Corporations 1.3% Net Income Tax - Individuals 33.8% Inheritance and Estate Tax 0.8% Liquor Permits and Tax 0.8% Public Service Companies Tax 2.4% Tobacco Tax 1.3% Insurance Companies Premiums Tax 2.4% Franchise Tax 0.4% Transient Accommodations Tax 4.2%

State Revenues and Council on Revenues Update

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General Fund Tax Revenue Collections & Projections ($mm)

Actual Projected

$4,426 $4,590 $4,640 $4,202 $4,364 $4,324 $4,973 $5,468 $5,371 $5,735 $6,194 $6,315 $6,796 $7,136 $7,421 $7,718 $8,027 $8,348 $8,682 $9,029 $7,081 $7,365 $7,659 $7,966 $8,284 $8,616 $8,960 $0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000 $8,000 $9,000 $10,000 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 COR Forecast from Meeting on September 6, 2018 COR Forecast from Meeting on January 9, 2019

 The General Fund Financial Plan is updated regularly in response to the independent Council on Revenues' quarterly

revenue forecasts, expense projections and actual revenue collections

 Revenue projections are based on COR projections as of January 2019  Expenditure projections include:

― FY 2019 – 2021 biennium budget ― Implementation of step-up contributions for pension ― Full funding of ARC based on FY 2017 and FY 2018 OPEB valuation

General Fund Financial Plan

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Updated General Fund Financial Plan ($mm)

____________________ Sources: Department of Accounting and General Services; Department of Budget and Finance, January 2019. Note: Reflects Act 49, SLH 2017. Due to rounding, details may not add to totals. Executive Branch’s FY 2018-19 expenditures include the FB 2017-19 Executive Budget as amended by the Governor’s Budget Messages #1-4 and B&F’s recommended

• adjustments. (1) Unaudited. The State’s modified cash-basis statements are not directly comparable with the State's audited financial statements, which are on a modified accrual basis. (2) Reflects 2018 actual revenue collections as reported by

the Department of Accounting and General Services. (3) Reflects FY 2019 - 2025 Council on Revenues’ January 2019 projections. (4) Incorporates various legislative proposals with general fund impact that will be submitted to the 2019 Legislature. (5) Executive Branch’s FY 2019 expenditures reflect Act 49, SLH 2017, as amended by Act 53, SLH 2018. FYs 2020-2025 expenditures based on Act 49, SLH 2017, as amended by Act 53, SLH 2018, and adjusted to include the FY 2019-2021 Executive

• Budget. (6) Reflects specific appropriations from 2017 and 2018 legislatures and estimated out year costs. (7) Includes: proposals with expenditure impact to be submitted to the 2019 Legislature; and Other Post-Employment Benefit adjustment

pursuant to the 2018 actuarial valuation. (8) FY 2024 and FY 2025 expenditures are not yet available, therefore FY 2023 expenditures were used for FY 2024 and FY 2025.

Actual Est. Est. Est. Est. Est. Est. Est. FY 181 FY 19 FY 20 FY 21 FY 22 FY 23 FY 248 FY 258 Total Revenues2,3,4 7,660.4 7,800.3 8,073.5 8,337.2 8,649.0 8,974.2 9,347.2 9,685.7 Total Expenditures5,6,7 7,803.9 7,943.6 8,195.7 8,439.7 8,621.9 8,784.5 8,950.5 9,089.0 Revenue Over (Under) Expenditures5

• 143.5
• 143.2
• 122.2
• 102.5

27.2 189.7 396.7 596.7 Carry-Over Balance Beginning 893.8 750.3 607.1 484.9 382.4 409.6 599.3 996.0 Ending 750.3 607.1 484.9 382.4 409.6 599.3 996.0 1,592.7

Emergency Budget and Reserve Fund ("EBRF")

 FY 2018 ending balance of $375.7 million, which includes a

$65 million increase from FY 2017

 Policy target at 10% of prior fiscal year revenues

Hawai‘i Hurricane Relief Fund ("HHRF")

 FY 2018 market valuation of $182.5 million  While not a formal budgetary reserve, HHRF remains available

as a liquidity source, if needed

 Investment income goes to the General Fund

Historical EBRF and HHRF Balances

____________________ Source: State of Hawai‘i, Department of Budget and Finance. (1) Excess investment earnings swept from HHRF.

(1)

Reserves and Liquidity

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$83.2 $90.2 $100.9 $310.7 $375.7 $126.6 $182.4 $186.9 $182.5 $182.5 $209.8 $272.6 $287.8 $493.2 $558.2

$0 $100 $200 $300 $400 $500 $600 2014 2015 2016 2017 2018

Millions

EBRF HHRF

Fiscal Year

Debt Service as % of General Fund Revenues(2)

Fiscal Year

G.O. Debt Service Profile(1)

 Principal and interest on G.O. Bonds are a first charge on the

General Fund and have a pledge of full faith and credit

 G.O. Bonds have conservative Constitutional constraints on

debt structure

‒ Limits final maturity to 25 years and principal can be deferred no more than 5 years ‒ Requires level debt service or level principal amortization ‒ Maximum annual debt service can be no more than 18.5% of the average of the prior three year General Fund revenues

 No statewide ballot initiatives required for debt issuance  The State conservatively manages its debt portfolio

‒ Bonds issued with 20 year maturity and level debt service ‒ Short amortization of taxable bonds minimizes interest cost ‒ Short taxable maturity absorbs premium and avoids costly capitalized interest ‒ 100% fixed rate debt with no derivatives ‒ BABs debt service is budgeted on a gross basis

 G.O. debt service as a percentage of General Fund revenues

has been relatively constant across multiple economic cycles

____________________ Source: State of Hawai‘i, Department of Budget and Finance. (1) Excludes $321 million of reimbursable G.O. Bonds. The State also has a de minimis amount of Certificates of Participation outstanding. (2) Excludes reimbursable G.O. Bond debt service.

0% 2% 4% 6% 8% 10% 12% 14% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Fiscal Year

$- $100 $200 $300 $400 $500 $600 $700 $800

Millions

General Obligation Debt Management

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For questions, please contact the following individuals: State of Hawai‘i, Department of Budget & Finance Scott Kami (scott.a.kami@hawaii.gov, 808-586-1612) Marilyn Chock (marilyn.e.chock@hawaii.gov, 808-586-1615) Linda Shintani (linda.k.shintani@hawaii.gov, 808-586-1630) Bank of America Merrill Lynch (Lead Bookrunner) Frank Lauterbur (frank.lauterbur@baml.com, 213-345-9575) Craig Dussinger (craig.dussinger@baml.com, 213-345-9579) Additional information may also be found at: http://investorrelations.hawaii.gov/ (pictured)

Date* Event January 28 Receive Ratings & Post P.O.S. January 29 Hawaii Retail Broker Luncheon February 5 Retail Order Period February 6 Institutional Order Period February 21 Closing

Financing Schedule, Investor Relations Link and Contact Information

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* Preliminary, subject to change

The State will be available for one-on-one conversations via telephone prior to institutional pricing. If you would like to schedule a time, please reach out to Bank of America Merrill Lynch

Mahalo!

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